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Does accounting conservatism pay?

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  • Raghavan J. Iyengar
  • Ernest M. Zampelli

Abstract

We investigate whether or not there is a link between conservative accounting practices and the sensitivity of executive pay to accounting performance. Using several accrual-based measures of accounting conservatism as well as alternative measures of accounting performance, we estimate an econometric model of CEO compensation that incorporates the interaction of accounting conservatism and accounting performance. Consistent with optimal contracting theory, we find that the sensitivity of executive pay to accounting performance is higher for firms that report conservative accounting earnings. These results support the hypothesis that accounting conservatism, by limiting earnings management opportunities and improving the reliability of accounting performance measures, allows firms to formulate contracts that tie executive compensation more closely to accounting performance. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

Suggested Citation

  • Raghavan J. Iyengar & Ernest M. Zampelli, 2010. "Does accounting conservatism pay?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(1), pages 121-142.
  • Handle: RePEc:bla:acctfi:v:50:y:2010:i:1:p:121-142
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-629X.2009.00325.x
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    Cited by:

    1. Takuya Iwasaki & Shota Otomasa & Atsushi Shiiba & Akinobu Shuto, 2015. "To test the implication of Watts' (2003) argument that accounting conservatism increases the efficiency of executive compensation contracts, we investigate the relationship between accounting conserva," CARF F-Series CARF-F-370, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Takuya Iwasaki & Shota Otomasa & Atsushi Shiiba & Akinobu Shuto, 2012. "Excess Executive Compensation and the Demand for Accounting Conservatism," Discussion Paper Series DP2012-08, Research Institute for Economics & Business Administration, Kobe University.
    3. repec:hit:hjbswp:175 is not listed on IDEAS

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